TearLab Corp - FORM 10-Q - August 12, 2011

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EXCEL - IDEA: XBRL DOCUMENT - TearLab Corp	Financial_Report.xls
EX-31.2 - EXHIBIT 31.2 - TearLab Corp	ex31-2.htm
EX-32.2 - EXHIBIT 32.2 - TearLab Corp	ex32-2.htm
EX-32.1 - EXHIBIT 32.1 - TearLab Corp	ex32-1.htm
EX-31.1 - EXHIBIT 31.1 - TearLab Corp	ex31-1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

(X)	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: June 30, 2011

( )	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________ to _______________

Commission File Number: 000-51030

TearLab Corporation

(Exact name of registrant as

specified in its charter)

Delaware		59 343 4771
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

7360 Carroll Road, Suite 200, San Diego, CA 92121

(Address of principal executive offices)

(858) 455-6006

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ý No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes o No o

Indicate by check mark whether registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o Accelerated filer o

Non-accelerated filer o (Do not check if a smaller reporting company) Smaller reporting company ý

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes o No ý

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 20,414,993 as of August 5, 2011.

PART I.	FINANCIAL INFORMATION

Item 1.	Consolidated Financial Statements
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosures about Market Risk
Item 4.	Controls and Procedures


PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings
Item 1A.	Risk factors
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.	Defaults upon Senior Securities
Item 4.	(Removed and Reserved)
Item 5.	Other Information
Item 6.	Exhibits

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements relating to future events and our future performance within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. In some cases, you can identify forward-looking statements by terms such as "may," "will," "should," "could," "would," “hope,” "expects," "plans," "intends," "anticipates," "believes," "estimates," "projects," "predicts," “pursue,” "potential" and similar expressions intended to identify forward-looking statements. These forward-looking statements include, without limitation, statements relating to future events, future results, and future economic conditions in general and statements about:

Our future strategy, structure, and business prospects;

The planned commercialization of our current product;

The size and growth of the potential markets for our product and technology;

The adequacy of current, and the development of new distributor, reseller, and supplier relationships, and our efforts to expand relationships with distributors and resellers in additional countries;

Our anticipated expansion of United States and international sales and operations;

Our ability to obtain and protect our intellectual property and proprietary rights;

Our efforts to obtain certain FDA approvals;

The results of our clinical trials;

Our plan to continue to develop and execute our conference and podium strategy to ensure visibility and evidence-based positioning of the TearLab® Osmolarity System among eye care professionals;

Our anticipated sales to additional customers in the United States if a CLIA waiver categorization is obtained;

Our ability to obtain reimbursement for patient testing with the TearLab® System;

Our efforts to assist our customers in obtaining their moderate complexity CLIA certification or providing them with support from certified professionals;

Our efforts to obtain CLIA waiver;

The adequacy of our funding and our forecast of the period of time through which our financial resources will be adequate to support our operations; and

Use of cash, cash needs and ability to raise capital.

These statements involve known and unknown risks, uncertainties and other factors, including the risks described in Part II, Item 1A. of this Quarterly Report on Form 10-Q, which may cause our actual results, performance or achievements to be materially different from any future results, performances, time frames or achievements expressed or implied by the forward-looking statements. Given these risks, uncertainties and other factors, you should not place undue reliance on these forward-looking statements. Information regarding market and industry statistics contained in this Quarterly Report on Form 10-Q is included based on information available to us that we believe is accurate. It is generally based on academic and other publications that are not produced for purposes of securities offerings or economic analysis. We have not reviewed or included data from all sources and cannot assure you of the accuracy of the market and industry data we have included.

Unless the context indicates or requires otherwise, in this Quarterly Report on Form 10-Q, references to the “Company” shall mean TearLab Corporation or TearLab Corp. and its subsidiaries. References to “$” or “dollars” shall mean U.S. dollars unless otherwise indicated.

TearLab Corp.

PART I.	FINANCIAL INFORMATION

ITEM 1.	CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

CONSOLIDATED BALANCE SHEET

(expressed in U.S. dollars)

($ 000’s)

		June 30, 2011			December 31, 2010
		(Unaudited)
ASSETS
Current assets
Cash and cash equivalents	$	6,881		$	2,726
Accounts receivable, net		238			312
Due from related parties		35			130
Inventory, net		994			555
Prepaid expenses		227			322
Other current assets		14			33
Total current assets		8,389			4,078

Fixed assets, net		165			126
Patents and trademarks, net		178			192
Intangible assets, net		6,532			7,139
Total assets	$	15,264		$	11,535

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	694		$	353
Accrued liabilities		1,320			1,441
Due to stockholders		28			28
Deferred revenue		—			128
Obligations under warrants		5,518			39
Notes payable and accrued interest		—			1,669
Total current liabilities		7,560			3,658


Stockholders’ equity
Capital stock
Preferred Stock, $0.001 par value, authorized 10,000,000, none outstanding		—			—
Common stock, $0.001 par value, 65,000,000 authorized, 20,414,993 and 14,775,366 issued and outstanding at June 30, 2011 and December 31, 2010, respectively		20			15
Additional paid-in capital		392,883			386,588
Accumulated deficit		(385,199	)		(378,726	)
Total stockholders’ equity		7,704			7,877
Total liabilities and stockholders’ equity	$	15,264		$	11,535

See accompanying notes to interim consolidated financial statements

TearLab Corp.

CONSOLIDATED STATEMENTS OF OPERATIONS

(expressed in U.S. dollars except number of shares)

(Unaudited)

($ 000’s)

		Three months ended June 30,
		2011		2010

Revenue	$	468		$ 418
Cost of goods sold (excluding amortization of intangible assets)		276		198
Gross profit		192		220
Operating expenses
General and administrative		939		1,025
Clinical, regulatory and research & development		228		297
Sales and marketing		433		346
Amortization of intangible assets		304		304
Total operating expenses		1,904		1,972
Loss from operations		(1,712	)	(1,752	)
Other income (expense)
Interest income		1		8
Changes in fair value of warrant obligations		(2,506	)	403
Warrant issuance costs		(303	)	—
Interest expense		(43	)	(53	)
Amortization of deferred financing charges		(241	)	(139	)
Other (loss)		(2	)	(7	)
Total other (expense) / income		(3,094	)	212
Net loss	$	(4,806	)	$ (1,540	)
Weighted average shares outstanding - basic and diluted		15,282,274		14,765,794
Loss per share – basic and diluted	$	(0.31	)	$ (0.10	)

See accompanying notes to interim consolidated financial statements

TearLab Corp.

CONSOLIDATED STATEMENTS OF OPERATIONS

(expressed in U.S. dollars except number of shares)

(Unaudited)

($ 000’s)

	Six months ended
	June 30,
	2011			2010

Revenue	$	1,291		$	693
Cost of goods sold (excluding amortization of intangible assets)		687			388
Gross profit		604			305
Operating expenses
General and administrative		1,848			1,990
Clinical, regulatory and research & development		475			765
Sales and marketing		874			621
Amortization of intangible assets		607			607
Total operating expenses		3,804			3,983
Loss from operations		(3,200	)		(3,678	)
Other income (expense)
Interest income		3			10
Changes in fair value of warrant obligations		(2,467	)		473
Warrant issuance costs		(303	)		—
Interest expense		(96	)		(105	)
Amortization of deferred financing charges		(403	)		(293	)
Other (loss)		(7	)		(27	)
Total other (expense) / income		(3,273	)		58
Net loss	$	(6,473	)	$	(3,620	)
Weighted average shares outstanding - basic and diluted		15,030,220			13,417,021
Loss per share – basic and diluted	$	(0.43	)	$	(0.27	)

See accompanying notes to interim consolidated financial statements

TearLab Corp.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(expressed in U.S. dollars)

(Unaudited)

($ 000’s)

	Six months ended June 30,
	2011			2010

OPERATING ACTIVITIES
Net loss for the period	$	(6,473	)	$ (3,620	)
Adjustments to reconcile net loss to cash used in operating activities:
Stock-based compensation and stock-based restructuring charges		301		798
Depreciation of fixed assets		43		34
Amortization of patents and trademarks		14		14
Amortization of intangible assets		607		607
Amortization of deferred financing charges, warrants and beneficial conversion values		403		293
Changes in fair value of warrant obligations		2,467		(473	)
Warrant issuance costs		303		—
Non-cash advisory fees paid in common shares		311		—
Non-cash interest accrued on convertible debt funding		96		105
Gain on disposal of fixed assets		—		(2	)
Net change in non-cash working capital balances related to operations		(84	)	(276	)
Cash used in operating activities		(2,012	)	(2,520	)

INVESTING ACTIVITIES
Additions to fixed assets, net of proceeds		(82	)	(25	)
Cash used in investing activities		(82	)	(25	)

FINANCING ACTIVITIES
Proceeds from issuance of shares and warrants in a private placement financing		7,000		3,000
Proceeds from issuance of shares and warrants in a registered direct financing		—		5,000
Costs of issuance of shares and warrants in private placement and registered direct financings		(751	)	(807	)
Cash provided by financing activities		6,249		7,193

Net increase in cash and cash equivalents during the period		4,155		4,648
Cash and cash equivalents, beginning of period		2,726		106
Cash and cash equivalents, end of period	$	6,881		$ 4,754

See accompanying notes to interim consolidated financial statements

TearLab Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(expressed in U.S. dollars except as otherwise stated)

(Unaudited)

1. BASIS OF PRESENTATION

Nature of Operations

TearLab Corp. (formerly OccuLogix, Inc.) ("TearLab" or the "Company"), a Delaware corporation, is an ophthalmic device company that is commercializing a proprietary in vitro diagnostic tear testing platform, the TearLab® test for dry eye disease, or DED, which enables eye care practitioners to test for highly sensitive and specific biomarkers using nanoliters of tear film at the point-of-care.

The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. Intercompany accounts and transactions have been eliminated on consolidation. The Company currently operates as one segment.

The consolidated balance sheet at December 31, 2010 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.

2. SIGNIFICANT ACCOUNTING POLICIES

These unaudited interim consolidated financial statements have been prepared using significant accounting policies that are consistent with the policies used in preparing the Company’s audited consolidated financial statements for the year ended December 31, 2010. Management believes that all adjustments necessary for the fair presentation of results, consisting of normally recurring items, have been included in the unaudited consolidated financial statements for the interim periods presented. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The principal areas of judgment relate to the impairment of long-lived and intangible assets and the value of stock options and warrants.

Recent Accounting Pronouncements

In October 2009, the Financial Accounting Standards Board (“FASB”) issued an amendment to the accounting standards related to the accounting for revenue in arrangements with multiple deliverables including how the arrangement consideration is allocated among delivered and undelivered items of the arrangement. Among the amendments, this standard eliminates the use of the residual method for allocating arrangement consideration and requires an entity to allocate the overall consideration to each deliverable based on an estimated selling price of each individual deliverable in the arrangement in the absence of having vendor-specific objective evidence or other third party evidence of fair value of the undelivered items. This standard also provides further guidance on how to determine a separate unit of accounting in a multiple-deliverable revenue arrangement and expands the disclosure requirements about the judgments made in applying the estimated selling price method and how those judgments affect the timing or amount of revenue recognition. This standard, was adopted by the Company effective on January 1, 2011 and did not have a material impact on the Company’s financial statements.

TearLab Corp.

3. BALANCE SHEET DETAILS :

Accounts receivable

(in thousands)	June 30, 2011			December 31, 2010
Trade receivables	$	305		$	311
Allowance for doubtful accounts		(83	)		(13	)
Other receivables		16			14
	$	238		$	312

Inventory

Inventory is recorded at the lower of cost or market and consists of finished goods. Inventory is accounted for on a first-in, first-out basis. Deferred cost of sales (included in finished goods) consists of products shipped but not recognized as revenue because they did not meet the revenue recognition criteria.

(in thousands)	June 30, 2011			December 31, 2010
Finished goods	$	1,111		$	671
Inventory reserves		(117	)		(116	)
	$	994		$	555

The Company evaluates inventory for estimated excess quantities and obsolescence, based on expected future sales levels and projections of future demand, with the excess inventory provided for. In addition, the Company assesses the impact of changing technology and market conditions.

Prepaid Expenses

(in thousands)	June 30, 2011		December 31, 2010
Prepaid insurance	$	61	$	122
Prepaid advisory services costs		52		83
Prepaid regulatory fees		23		—
Deferred royalty costs		—		36
Other fees and services		91		81
	$	227	$	322

Fixed Assets

(in thousands)	June 30, 2011			December 31, 2010
Furniture and office equipment	$	49		$	48
Computer equipment and software		154			151
Demo equipment		40			33
Rental equipment		51			—
Medical equipment		335			317
		629			549
Less accumulated depreciation		(464	)		(423	)
	$	165		$	126

Depreciation expense was $43,000 and $34,000 during the six months ended June 30, 2011 and 2010, respectively, and $23,000 and $18,000 during the three months ended June 30, 2011 and 2010, respectively.

TearLab Corp.

Patents and trademarks

(in thousands)	June 30, 2011			December 31, 2010
Patents	$	236		$	236
Trademarks		32			32
		268			268
Accumulated amortization		(90	)		(76	)
	$	178		$	192

Amortization expense of patents and trademarks was $14,000 and $14,000 during the six months ended June 30, 2011 and 2010, respectively, and $7,000 and $7,000 during the three months ended June 30, 2011 and 2010, respectively.

Accrued liabilities

(in thousands)

	June 30,		December 31,
	2011		2010
Due to professionals	$	269	$	296
Due to employees and directors		396		332
Corporate compliance		179		63
Clinical trial accruals		174		174
Amounts due for provision of capital transaction advisory services……………….		—		200
Accrued royalty payments		43		84
Product return reserve		19		73
Product warranties		65		51
Obligation to repay advances received		50		50
Other		125		118
	$	1,320	$	1,441

4. INTANGIBLE ASSETS

The Company's intangible assets consist of the value of TearLab® Technology acquired in the acquisition of TearLab Research. The TearLab Technology consists of a disposable lab card and card reader, supported by an array of patents and patent applications that are either held or in-licensed by the Company. The TearLab Technology is being amortized using the straight-line method over an estimated useful life of 10 years. Amortization expense for the three and six months ended June 30, 2011 and 2010 was $304,000, $304,000, $607,000 and $607,000, respectively.

Intangible assets subject to amortization consist of the following:

	June 30, 2011				December 31, 2010
	Cost		Accumulated Amortization		Cost		Accumulated Amortization
TearLab® technology	$	12,172	$	5,640	$	12,172	$	5,033

The estimated amortization expense for the intangible assets for the remainder of 2011 and each of the next four years and thereafter is as follows:

	Amortization of intangible assets ($ 000’s)
Remainder of 2011	$	608
2012		1,215
2013		1,215
2014		1,215
2015		1,215
Thereafter		1,064
	$	6,532

TearLab Corp.

5. RELATED PARTY TRANSACTIONS

On August 20, 2009, the Company entered into a distribution agreement with Science with Vision, pursuant to which Science with Vision obtained exclusive Canadian distribution rights with respect to the Company’s products. The Company began selling products through the Canadian distributor in 2010. Sales to this distributor for the three and six months ended June 30, 2011 and 2010 were $24,000, $0, $62,000 and $47,000, respectively, and the outstanding accounts receivable balances due at June 30, 2011 and December 31, 2010 were $24,000 and $33,000, respectively. The Company’s chairman of the board of directors and chief executive officer has a material financial interest in Science with Vision.

Effective November 20, 2009, the Company entered into an agency agreement with Marchant Securities Inc. (“Marchant”). Pursuant to the terms of the agreement, Marchant acted as the Canadian placement agent in connection with the Company’s private placement of up to $3,000,000 of the Company’s common stock. As a result of the closing of the private placement financings in January 2010 and March 2010, under the Agency agreement, the Company issued an aggregate of 101,548 shares to Marchant. The Company’s chairman of the board of directors and chief executive officer has a material financial interest in Marchant.

The Company has also agreed to indemnify Marchant, its affiliates and their respective directors, officers, employees, shareholders and agents against all expenses, losses, claims, actions, damages or liabilities, and the reasonable fees and expenses of their counsel, arising out of the provision of the services pursuant to the agreement.

On November 2, 2009, the Company, entered into a capital advisory agreement for a minimum of two years with Greybrook Capital Inc., or Greybrook, which was amended on January 8, 2010. Pursuant to the terms of the agreement, as amended, Greybrook received a cumulative total of 163,934 common shares. On April 14, 2011 the Company issued 163,934 common shares to Greybrook to satisfy the outstanding liability related to both years. The Company’s chairman of the board of directors and chief executive officer, is a principal with, and holds a material financial interest in Greybrook.

The Company currently has an employee who formerly served as a United States distributor of the Company’s products. This employee is no longer in control of the distributor; however the employee continues to hold a material financial interest in the distributing company. Sales to this distributor for the three and six months ended June 30, 2011 and 2010 were $0 and $36,000, and $9,000 and $44,000, respectively, and the outstanding accounts receivable balances at June 30, 2011 and December 31, 2010 were $22,000 and $98,000, respectively.

6. CONVERTIBLE NOTES PAYABLE AND ACCRUED INTEREST

In July 2009, the Company entered into an agreement with certain investors whereby the investors agreed to provide financing (the “Financing”) to the Company through the purchase of convertible secured notes (“the Notes”), in the aggregate amount of $1.55 million. On August 31, 2009, an additional $200,000 of financing was received by the Company to bring the aggregate total funding received to $1.75 million. The Notes evidencing the Financing, were to mature on the second anniversary of their issuance (“the Maturity Date”), bearing interest at a rate of 12% per annum and were convertible into shares of the Company’s common stock upon the request of holders of 51% or more of the outstanding principal amount of the Notes at any time after August 31, 2009 and prior to the Maturity Date. The conversion price of the Notes (the “Discount Price”) was $1.3186 determined on August 31, 2009 and represented 80% of the volume weighted average price on the NASDAQ stock market for the ten trading days prior to August 31, 2009. The Notes were secured by substantially all of the assets of the Company.

TearLab Corp.

On June 13, 2011, upon the request of holders of 51% or more of the outstanding principal amount of the Notes, the Company issued 1,629,539 shares of its common stock in consideration of the conversion and retirement of the Company’s outstanding Financing obligations in the aggregate amount of $2,149,000, with associated issuance costs of $41,000 (the Conversion). In connection with the Conversion, the Company issued warrants with a life of five years to purchase 109,375 shares of common stock (the “Warrants”). The exercise price of the Warrants is $1.60 per common share representing the price per share equal to the closing bid price per share of the Company’s common stock on the NASDAQ stock market on July 15, 2009. The fair value of the warrants totaling $163,000, calculated using the Black-Scholes value model, was initially recorded at the Financing date in additional paid-in capital and accreted over the term of the Notes through the conversion date. The company recorded amortization charges of $42,000 and $70,000 and $24,000 and $51,000 for the three and six months ended June 30, 2011 and 2010, respectively, included in other income (expense).

As the conversion price of the Notes reflected a price discounted from the fair market value of the Company’s common stock, there was a deemed beneficial conversion feature associated with the Financing. The Company recorded $728,000 representing the value of the beneficial conversion feature at the date of the Financing in additional paid-in capital. The value of the beneficial conversion was being amortized over the term of the Notes through the conversion date with charges of $188,000 and $314,000, and $108,000 and $228,000 for the three and six months ended June 30, 2011 and 2010, respectively, included in other income (expense).

The Company incurred $87,000 in legal and consulting expenses related to the Financing which was allocated to deferred finance charges for $43,000 and cost of equity for $44,000 in proportion to the allocation of the Financing amount between equity and liabilities. The value of the deferred charges was amortized over the term of the Notes through the conversion date and expenses of $11,000 and $19,000, and $6,000 and $14,000 for the three and six months ended June 30, 2011 and 2010, respectively, are included in other income (expense).

Richard Lindstrom, M.D. and Tom Davidson, both of whom are or were directors of the Company at the time of this agreement, invested $100,000 each in the Financing. Greybrook Corporation, an entity controlled by Elias Vamvakas, Chairman and Interim CEO of the Company, or members of his family, invested $310,000 in the Financing.

7. FAIR VALUE MEASUREMENTS

The Company measures certain assets and liabilities in accordance with authoritative guidance which requires fair value measurements be classified and disclosed in one of the following three categories:

Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities.

Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.

Level 3: Unobservable inputs are used when little or no market data is available.

Assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurements. The Company reviews the fair value hierarchy classification on a quarterly basis. Changes in the ability to observe valuation inputs may result in a reclassification of levels for certain securities within the fair value hierarchy. The Company did not have any assets or liabilities in Level 1 and Level 2 and no transfers to or from Level 3 of the fair value measurement hierarchy during the six months ended June 30, 2011.

At June 30, 2011, the Company has a liability for warrants to purchase 131,497 shares of common stock at an exercise price of $46.25 per share that are valued at $0, a liability for warrants to purchase 621,118 shares of common stock at an exercise price of $4.00 per share that are valued at $0, as well as a liability for warrants to purchase 3,846,154 shares of common stock at an exercise price of $1.86 per share valued at $5,518,000 (Note 8). All warrant liabilities are classified as Level 3 fair value measurements.

The following table provides a reconciliation for all liabilities measured at fair value using significant unobservable inputs (Level 3) for the six months ended June 30, 2011 (in thousands):

TearLab Corp.

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
Balance of warrant liability at January 1, 2011	$	39
Change in fair value of warrant liability included in other (income) / expense		2,467
Issuances of warrants		3,012
Balance of warrant liability at June 30, 2011	$	5,518

8. CAPITAL STOCK

(a) Authorized share capital

The total number of authorized shares of common stock of the Company is 65,000,000. Each share of common stock has a par value of $0.001 per share. The total number of authorized shares of preferred stock of the Company is 10,000,000. Each share of preferred stock has a par value of $0.001 per share.

(b) Common stock

On February 11, 2009, the Company filed with the Securities and Exchange Commission (“SEC”), a prospectus as part of a registration statement on Form S-3 using a "shelf" registration process. Under the shelf process, the Company may from time to time offer or sell any combination of common stock, preferred stock, debt securities, depository shares or warrants in one or more offering up to a total dollar value of $30,000,000. The registered direct financing which closed on March 18, 2010 was effected under this “shelf” registration.

On January 11, 2010, the Company sold 1,886,291 shares of its common stock for an aggregate of approximately $1,744,000. The Company also received commitments to purchase an additional 1,358,475 shares of its common stock for an aggregate of approximately $1,256,000 subject to obtaining stockholder approval which was received on March 3, 2010. The additional shares were issued on March 19, 2010. Related to this equity issuance transaction, the Company issued 101,548 shares to Marchant, a related party, for its placement services (Note 5) and incurred issuance costs of $260,000.

On March 18, 2010, the Company closed a registered direct financing in which it sold 1,552,795 shares of its common stock and warrants to purchase 621,118 shares of its common stock for gross proceeds of approximately $5,000,000 with associated cash issuance costs of $617,000. The investors agreed to purchase the shares and warrants for $3.22 per unit (each unit consisting of one share and a warrant to purchase 0.4 shares of common stock). The exercise price of the warrants is $4.00 per share. The warrants are exercisable at any time on or after the sixth-month anniversary of the closing date through and until the 18-month anniversary of the closing of the offering.

On April 14, 2011 pursuant to the capital advisory agreement (Note 5), as amended, the Company issued 163,934 shares of common stock to Greybrook. Elias Vamvakas, Chairman of the Company's board of directors and acting Chief Executive Officer, is a principal with, and holds a material financial interest in, Greybrook.

On June 13, 2011, the Company issued 1,629,539 shares of its common stock as well as warrants (“Financing Warrants”) to purchase 109,375 shares of its common stock in consideration of conversion and retirement of the Company’s outstanding July and August 2009 debt obligations in the aggregate amount of $2,149,000 with associated costs of $41,000. The exercise price of the Financing Warrants is $1.60 per common share representing the price per share equal to the closing bid price per share of the Company’s common stock on the NASDAQ stock market on July 15, 2009.

On June 30, 2011, the Company closed a private placement financing in which 3,846,154 shares of common stock and warrants to purchase 3,846,154 shares of common stock for gross proceeds of approximately $7,000,000 were issued, with associated costs of $703,000, of which $303,000 was related to warrants and $400,000 to common shares. The investors purchased the shares and warrants for $1.82 per unit (each unit consisting of one share and one warrant to purchase shares of common stock). The exercise price of the warrants is $1.86 per share. The warrants are exercisable at any time from the date of issuance until June 30, 2016.

TearLab Corp.

The Company has a stock option plan, the 2002 Stock Option Plan (the "Stock Option Plan"), which was most recently amended on June 24, 2010 in order to increase the shares reserved under the Stock Option Plan by 800,000. Under the Stock Option Plan, up to 3,200,000 options are available for grant to employees, directors and consultants. Options granted under the Stock Option Plan may be either incentive stock options or non-statutory stock options. Under the terms of the Stock Option Plan, the exercise price per share for an incentive stock option shall not be less than the fair market value of a share of stock on the effective date of grant and the exercise price per share for non-statutory stock options shall not be less than 85% of the fair market value of a share of stock on the date of grant. No option granted to a holder of more than 10% of the Company's common stock shall have an exercise price per share less than 110% of the fair market value of a share of stock on the effective date of grant.

Options granted are typically service-based options. Generally, options expire 10 years after the date of grant. No incentive stock options granted to a 10% owner optionee shall be exercisable after the expiration of five years after the effective date of grant of such option, no option granted to a prospective employee, prospective consultant or prospective director may become exercisable prior to the date on which such person commences service, and with the exception of an option granted to an officer, director or consultant, no option shall become exercisable at a rate less than 20% per annum over a period of five years from the effective date of grant of such option unless otherwise approved by the Board.

The Company accounts for stock-based compensation under the authoritative guidance which requires that share-based payment transactions with employees be recognized in the financial statements based on their fair value and recognized as compensation expense over the vesting period. The amount of expense recognized during the period is affected by many complex and subjective assumptions, including: estimates of the Company’s future volatility, the expected term for its stock options, option exercise behavior, the number of options expected to ultimately vest, and the timing of vesting for the Company’s share-based awards.

The following table sets forth the total stock-based compensation expense resulting from stock options included in the Company's consolidated statements of operations (in thousands):

	Three months ended June 30,				Six months ended June 30,
	2011		2010		2011		2010
General and administrative	$	89	$	514	$	174	$	656
Clinical, regulatory and research and development		26		46		68		93
Sales and marketing		18		31		59		49
Stock-based compensation expense before income taxes	$	133	$	591	$	301	$	798

(d) Warrants

On February 6, 2007, pursuant to the 2007 Securities Purchase Agreement between the Company and certain institutional investors, the Company issued warrants to these investors (“2007 Warrants”). The 2007 Warrants are five-year warrants exercisable immediately into an aggregate of 127,050 shares of the Company's common stock at $46.25 per common share. On February 6, 2007, the Company also issued a warrant, (“the Cowen Warrant”) to Cowen and Company, LLC in partial payment of the placement fee for the services it had rendered as the placement agent in connection with the private placement of the shares and the 2007 Warrants pursuant to the 2007 Securities Purchase Agreement. The Cowen Warrant is a five-year warrant exercisable into an aggregate of 4,447 shares of the Company's common stock. The per share exercise price of the Cowen Warrant is $46.25, and the Cowen Warrant became exercisable on August 6, 2007.

TearLab Corp.

The Company accounts for the 2007 Warrants and the Cowen Warrant in accordance with accounting guidance which requires every derivative instrument within its scope to be recorded on the balance sheet as either an asset or liability measured at its fair value, with changes in fair value recognized in earnings unless specific hedge accounting criteria are met. Based on guidance applicable to derivatives, the Company determined that the 2007 Warrants and the Cowen Warrant do not meet the criteria for classification as equity. Accordingly, the Company classified the 2007 Warrants and the Cowen Warrant as current liabilities at June 30, 2011 and December 31, 2010.

The estimated fair value of the 2007 Warrants and the Cowen Warrant at June 30, 2011 was determined using the Black-Scholes option-pricing model with the following weighted average assumptions:

Volatility		16	%
Expected life of Warrants	0.58 years
Risk-free interest rate		0.12	%
Dividend yield		0	%

The Company is required to record the outstanding warrants at fair value at the end of each reporting period, resulting in an adjustment to the recorded liability of the derivative, with any gain or loss recorded in earnings of the applicable reporting period. The Company, therefore, estimated the fair value of the 2007 Warrants and the Cowen Warrant as of June 30, 2011 and determined the aggregate fair value to be $0, as compared to $1,000 as of December 31, 2010. This decrease of $1,000 was recorded as a gain in other income (expense) in the consolidated statement of operations for the six months ended June 30, 2011.

On March 18, 2010, the Company closed a registered direct financing in which it sold approximately 1,552,796 shares of its common stock and warrants ( “2010 Warrants”) to purchase 621,118 shares of its common stock for gross proceeds of approximately $5,000,000. The investors agreed to purchase the shares and warrants for $3.22 per unit (each unit consisting of one share and a warrant to purchase 0.4 shares of common stock). The exercise price of the 2010 Warrants is $4.00 per share. The 2010 Warrants are exercisable through September 18, 2011.

The Company accounts for the 2010 Warrants in accordance with applicable guidance to derivatives. The Company determined that the 2010 Warrants do not meet the criteria for classification as equity. Accordingly, the Company classified the 2010 Warrants as current liabilities at June 30, 2011 and December 31, 2010.

The estimated fair value of the Warrants at June 30, 2011 was determined using the Black-Scholes option-pricing model with the following weighted average assumptions:

Volatility		30	%
Expected life of Warrants	0.25 years
Risk-free interest rate		0.03	%
Dividend yield		0	%

The Company is required to record the outstanding warrants at fair value at the end of each reporting period, resulting in an adjustment to the obligations under warranty, with any gain or loss recorded in earnings of the applicable reporting period. The Company, therefore, estimated the fair value of the 2010 Warrants as of June 30, 2011 and determined the aggregate fair value to be $0, with a decrease of approximately $38,000 over the measurement of the aggregate fair value of the 2010 Warrants on December 31, 2010. This decrease was recorded as a gain in other income (expense) in the consolidated statement of operations for the six months ended June 30, 2011.

On June 30, 2011, the Company closed a private placement financing in which 3,846,154 shares of common stock and warrants (“2011 Warrants”) to purchase 3,846,154 shares of common stock for gross proceeds of approximately $7,000,000 were issued. The investors purchased the shares and warrants for $1.82 per unit (each unit consisting of one share and one warrant to purchase shares of common stock). The exercise price of the warrants is $1.86 per share. The warrants are exercisable at any time from the date of issuance until June 30, 2016.

The Company accounts for the 2011 Warrants in accordance with applicable guidance to derivatives. The Company determined that the 2011 Warrants do not meet the criteria for classification as equity. Accordingly, the Company classified the 2011 Warrants as current liabilities at June 30, 2011.

The estimated fair value of the 2011 Warrants at June 30, 2011 was determined using the Black-Scholes option-pricing model with the following weighted average assumptions:

Volatility		101	%
Expected life of Warrants	5.00 years
Risk-free interest rate		1.76	%
Dividend yield		0	%

TearLab Corp.

The Company initially allocated the total proceeds received, pursuant to the Securities Purchase Agreement, to the shares of common stock and warrants issued based on their relative fair values. This resulted in an allocation of $3,012,000 to warrant liability.

The Company is required to record the derivatives at fair value which results in an adjustment to the warrant liability, with any gain or loss recorded in earnings of the applicable reporting period. The Company therefore estimated the fair value of the warrants on the issuance date to be $5,518,000, and recorded the increase to the warrant liability of $2,506,000 over the allocated proceeds through the corresponding charge to its consolidated statements of operations.

Transaction costs associated with the issuance of the warrants of $303,000 were immediately expensed as warrant issuance costs in the Company’s consolidated statements of operations for the three and six months ended June 30, 2011.

In connection with the conversion of the notes payable and accrued interest (see Note 6), the Company issued warrants with a life of five years to purchase 109,375 shares of common stock. The exercise price of these warrants is $1.60 per common share representing the price per share equal to the closing bid price per share of the Company’s common stock on the NASDAQ stock market on July 15, 2009. The Company recorded $163,000 representing the fair value of the warrants at the date of financing in additional paid-in capital which was calculated using the Black-Scholes value model. The value of the warrants was accreted over the term of the Notes until their conversion in June 2011.

The following table provides activity for the Warrants outstanding through June 30, 2011 (in thousands, except weighted average exercise prices):

	Number of warrants outstanding		Weighted average exercise price
Outstanding, December 31, 2010		753	$	11.38
Granted		3,955		1.85
Forfeited		—		—
Outstanding, June 30, 2011		4,708	$	3.38

9. COMPREHENSIVE INCOME (LOSS)

For the three and six months ended June 30, 2011 and 2010, comprehensive loss was equal to net loss for each period.

10. NET LOSS PER SHARE

Basic earnings per share (EPS) is calculated by dividing net income or loss by the weighted average number of common shares and vested restricted stock units outstanding. Diluted EPS is computed by dividing net income or loss by the weighted average number of common shares and vested restricted stock units outstanding and the weighted average number of dilutive common stock equivalents, including stock options and non-vested restricted stock units. Common stock equivalents are only included in the diluted earnings per share calculation when their effect is dilutive.

The following table is a summary of the potentially dilutive securities that were excluded from the calculation of diluted loss per share as the effect is anti-dilutive (in thousands):

	As of June 30,
	2011		2010
Stock options		3,717		3,528
Shares reserved for issuance on convertible debt obligations		—		1,327
Warrants		4,708		732
Warrants to be issued on conversion of debt obligations		—		109
Total		8,425		5,696

TearLab Corp.

11. CONSOLIDATED STATEMENTS OF CASH FLOWS

The net change in non-cash working capital balances related to operations consists of the following:

	Six months ended June 30, ($ 000’s)
	2011			2010
Accounts receivable, net	$	74		$	(62	)
Due from related parties		95			(51	)
Inventory		(439	)		(144	)
Prepaid expenses		94			152
Other current assets		—			(5	)
Other non-current assets		—			67
Accounts payable		341			(149	)
Accrued liabilities		(121	)		(60	)
Deferred revenue		(128	)		(17	)
Due to stockholders		—			(7	)
	$	(84	)	$	(276	)

The following table lists those items that have been excluded from the consolidated statements of cash flows as they relate to non-cash transactions and additional cash flow information:

	Six months ended June 30, ($ 000’s)
	2011			2010
Non-cash investing activities
Common stock issued in consideration of notes payable and accrued interest conversion	$	2,149			—
Warrant issued in Registered Direct financing		3,012		$	737
Common stock issued to Marchant Securities Inc. for services provided in the equity issuance transaction.		—			155
Accrued costs of fixed assets		(7	)		(2	)

12. SUBSEQUENT EVENTS

On August 1, 2011, TearLab Corporation, or the Company, through its subsidiary, TearLab Research, Inc., entered into a manufacturing and development agreement, or the Manufacturing Agreement, with MiniFAB (Aust) Pty Ltd, or MiniFAB. Pursuant to the terms of the Manufacturing Agreement, MiniFAB will manufacture and supply test cards for the Company. The Manufacturing Agreement specifies minimum order quantities that will require the Company to purchase approximately AUD $29.8 million (approx. $31.2 million at June 30, 2011) in test cards from MiniFAB through the end of 2015. Each year, the Company must purchase the covered test cards exclusively from MiniFAB until the minimum order quantity for such year has been met. The Manufacturing Agreement has a ten year initial term and may be terminated by either party if the other party is in breach or becomes insolvent. If terminated for any reason other than a default by MiniFAB, the Company will be obligated to pay a termination fee based on the cost of products manufactured by MiniFAB, but not yet invoiced, repayment of capital invested by MiniFAB, less depreciation calculated in accordance with Australian accounting standards, and the expected profit to MiniFAB had the remaining minimum order quantities been purchased by the Company.

TearLab Corp.

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes, included in Item 1 of this Report. Unless otherwise specified, all dollar amounts are U.S. dollars.

Overview

We are an in vitro diagnostic company that has developed a proprietary tear testing platform, the TearLab® Osmolarity System. The TearLab test measures tear film osmolarity for diagnosis of Dry Eye Disease, or DED. Tear osmolarity is a quantitative and highly specific biomarker that has been shown to correlate with DED. The TearLab test enables the rapid measurement of tear osmolarity in a doctor's office. We refer to the results of our TearLab testing platform as our Point-of-Care business division in the discussion of our operating results below. Commercializing our Point-of-Care tear testing platform is now the focus of our business.

In October 2008, the TearLab Osmolarity System received CE mark approval, clearing the way for sales in the European Union and all countries recognizing the CE mark. In connection with the CE mark clearance, we have entered into multi-year agreements with numerous distributors for distribution of the TearLab Osmolarity System. Currently, we have signed distribution agreements in each of the following countries: Spain, Portugal, Germany, France, Turkey, Ukraine, Bulgaria, Belgium, Netherlands, Switzerland, Finland, Sweden, South Korea, Australia, Russia, Hungary, Greece, Canada, Slovakia, Argentina, the Czech Republic and the United Kingdom and a sales representation agreement in Japan.

On May 19, 2009, we announced that we received 510(k) clearance from the U.S. Food and Drug Administration, or the FDA. The 510(k) clearance allows us to market the TearLab Osmolarity System to those reference and physician operated laboratories with CLIA certifications allowing them to perform moderate and high complexity tests. Considering that most of our target customers currently are eye care practitioners without such certifications, we intend to seek a CLIA waiver from the FDA for the TearLab Osmolarity System as well as assisting our customers in obtaining their moderate complexity CLIA certification or providing them with support from certified professionals. A CLIA waiver would greatly reduce the regulatory compliance for our future customers. Until we receive the CLIA Waiver Certification, doctors using the TearLab Osmolarity System must be certified under the moderate complexity CLIA certification.

On March 4, 2011, the Company announced that it was in receipt of a communication from the FDA indicating that the data submitted by the Company was not sufficient to gain approval of its CLIA Waiver categorization application for the TearLab® Osmolarity System. The Company is reviewing the comments made by the FDA and developing the necessary responses or strategies required to continue to pursue the CLIA waiver. The Company will also continue to pursue it strategy to assist its customers in obtaining moderate complexity CLIA certificates.

On December 8, 2009 we announced that Health Canada issued a Medical Device License for the TearLab Osmolarity System. The Health Canada license allowed us to immediately begin marketing the system in Canada. On August 20, 2009, we entered into an agreement with a distributor, Science with Vision, for exclusive distribution of the TearLab Osmolarity System in Canada. We began selling products through the Canadian distributor in 2010.

On October 19, 2010 we announced that a unique new Current Procedural Terminology, or CPT code that will apply to the TearLab Osmolarity test has now been be published by the American Medical Association. The new code will become effective January 1, 2011. The new CPT code for the TearLab Osmolarity test is: 83861; Microfluidic analysis utilizing an integrated collection and analysis device, tear osmolarity (For microfluidic tear osmolarity of both eyes, report 83861 twice). This code falls under the Chemistry sub-section of the Pathology and Laboratory section of the CPT Codebook and will be listed under the 2010 Clinical Laboratory Fee Schedule by the Centers for Medicare and Medicaid Services (CMS). Reimbursement by CMS has been set at $24.01 per eye and will only be available for offices that have a Moderate Complex CLIA certificate until TearLab receives a CLIA Waiver categorization from the FDA. Under the 2011 Clinical Laboratory Fee Schedule listed by CMS the reimbursement rate was reduced to $23.58 and was applicable to a majority of states in the United States.

TearLab Corp.

Our success is highly dependent on our ability to increase sales of our testing platform in European and other countries recognizing the CE mark, in Canada where we have a Medical Device License and on our receipt of a CLIA waiver which will enable us to begin full commercialization efforts in the United States. Meeting these objectives requires that we have sufficient capital to fund our operations. Our working capital balance of $829,000 as of June 30, 2011 may be insufficient to fund our planned operations and our ability to generate increased revenues is uncertain. If our revenues do not increase sufficiently to meet operational needs we would be required to raise additional capital to fund our operations. Subsequent to the equity transactions in the second quarter of 2011 in which a gross aggregate of $7.0 million was raised, we have sufficient cash to fund our operations at current levels for at least the next 12 months. In spite of having adequate funding at this time we continue to evaluate various financing possibilities.

Recent Developments

On June 13, 2011, the Company issued 1,629,539 shares of its common stock and warrants (“Financing Warrants”) to purchase 109,375 shares of its common stock in consideration of conversion and retirement of the Company’s outstanding July and August 2009 debt obligations in the aggregate amount of $2,149,000, with associated issuance costs of $41,000. The exercise price of the Financing Warrants is $1.60 per common share representing the price per share equal to the closing bid price per share of the Company’s common stock on the NASDAQ stock market on July 15, 2009.

On June 30, 2011, the Company sold 3,846,154 shares of its common stock and warrants to purchase approximately 3,846,154 shares of its common stock for gross proceeds of approximately $7,000,000. The investors purchased the shares and warrants for $1.82 per unit (each unit consisting of one share and a warrant to purchase one share of common stock). The exercise price of the warrants is $1.86 per share. The warrants are exercisable at any time until June 30, 2016.

RESULTS OF OPERATIONS

Revenue, Cost of Sales and Gross Margin

	Three Months Ended June 30, (in thousands)								Six Months Ended June 30, (in thousands)
	2011			2010		Change			2011			2010		Change
	$			$		$			$			$		$

TearLab revenue		468			418		50			1,291			693		598

TearLab – cost of sales		276			198		78			687			388		299

TearLab gross profit		192			220		(28	)		604			305		299

Gross profit percentage		41	%		53%		(56%	)		47	%		44%		50%

Revenues

TearLab Revenue

TearLab revenue consists of sales of the TearLab® Osmolarity System, which is a hand-held tear film test for the measurement of tear osmolarity, a quantitative and highly specific biomarker that has shown to correlate with DED.

TearLab Corp.

The TearLab Osmolarity System consists of the following three components: (1) the TearLab disposable, which is a single-use microfluidic labcard; (2) the TearLab pen, which is a hand-held device that interfaces with the TearLab disposable; and (3) the TearLab reader, which is a small desktop unit that allows for the docking of the TearLab disposable and the TearLab pen and provides a quantitative reading for the operator.

TearLab revenue increased by $50,000 or 12% for the three months ended June 30, 2011 as compared to the prior year quarter due to a higher level of test card sales volume at higher average sales prices over the prior year period.

TearLab revenue increased by $598,000 or 86% for the six months ended June 30, 2011 as compared to the prior year period due to a higher level of North American sales volume at higher average sales prices and a non-recurring income item for international distribution rights that was not present in the prior year period.

TearLab Cost of Sales

TearLab cost of sales includes costs of goods sold, warranty, and royalty costs. Our cost of goods sold consists primarily of costs for the manufacture of the TearLab test, including the costs we incur for the purchase of component parts from our suppliers, applicable freight and shipping costs, fees related to warehousing and logistics inventory management.

TearLab costs of sales for the three months ended June 30, 2011 increased by $78,000 or 39% over the prior year fiscal period due to higher costs related to materials, freight, and promotional items as the Company continues its expansion into North America and other global territories.

For the six months ended June 30, 2011, TearLab costs of sales increased by $299,000 or 77% over the prior year fiscal period due to similar reasons indicated in the above.

TearLab Gross Margin

TearLab gross margin for the three months ended June 30, 2011 decreased by $28,000 or 13% compared to the prior year fiscal period due to higher costs related to materials, freight, and promotional items as the Company continues its expansion into North America and other global territories.

TearLab gross margin for the six months ended June 30, 2011 increased by $299,000 or 98% compared to the prior year fiscal period due to higher a higher level of North American sales volume at higher average sales prices and a non-recurring income item for international distribution rights that was not present in the prior year period.

Operating Expenses

	Three months ended June 30 (in thousands)						Six months ended June 30 (in thousands)
	2011		2010		Change		2011		2010		Change
	$		$		$		$		$		$
Amortization of intangible assets		304		304		―		607		607		―
General and administrative		939		1,025		(86)		1,848		1,990		(142)
Clinical, regulatory and research and development		228		297		(69)		475		765		(290)
Sales and marketing		433		346		87		874		621		253

Operating expenses		1,904		1,972		(68)		3,804		3,983		(179)

General and Administrative Expenses

For the three months ended June 30, 2011, general and administrative expenses decreased by $86,000 or 8%, as compared with the corresponding period in 2010, primarily due to a $250,000 decrease in executive management bonus accruals and non-cash stock option, advisory fee and director fee expenses, offset by a $55,000 increase in operational infrastructure expenses.

TearLab Corp.

For the six months ended June 30, 2011, general and administrative expenses decreased by $142,000 or 7%, as compared with the corresponding period in 2010, primarily due to a $324,000 decrease in executive management bonus accruals, advisory fees and non-cash stock option and director fee expenses, offset by a $68,000 increase in public company and operational infrastructure expenses.

We are continuing to focus our efforts on controlling costs by reviewing and improving upon our existing business processes and cost structure.

Clinical, Regulatory and Research and Development Expenses

Total clinical, regulatory and research and development expenses decreased by $69,000 or 23% during the three months ended June 30, 2011, as compared with the corresponding prior year period. The decrease was due to a $36,000 decrease in employee related costs as compared to the prior year, which included executive bonus accruals for management. Additionally, the Company experienced a $34,000 decrease in costs related its CLIA waiver submission and clinical trial activities.

For the six months ended June 30, 2011, clinical, regulatory and research and development expenses decreased by $290,000 or 38%, as compared with the corresponding prior year period. The decrease was due to a $153,000 decrease in employee related costs as compared to the prior year, which included executive bonus accruals for an R&D executive. Additionally, the Company experienced an $133,000 decrease in costs related its CLIA waiver submission and clinical trial activities.

Sales and Marketing Expense

Sales and marketing expenses increased by $87,000 or 25% during the three months ended June 30, 2011, as compared with the comparable period in fiscal 2010 due to increased sales and business development activities associated with the commercialization of the TearLab product in the United States that were not present in the prior year.

For the six months ended June 30, 2011 sales and marketing expenses increased by $253,000 or 41%, as compared with the comparable period in fiscal 2010. The increase is due to $251,000 in sales, marketing trade show, and business development costs associated with the commercialization of the TearLab product in the United States that were not present in the prior year.

The cornerstone of our sales and marketing strategy to date has been to increase awareness of our products among eye care professionals and, in particular, the key opinion leaders in the eye care professions. We assist key opinion leaders in performing clinical trials to generate increased data to provide an increased understanding in the use of the TearLab Osmolarity System for diagnostic, treatment and monitoring of patients. Presently we are primarily focused on commercialization in North America and are working with our customers to assist them in receiving their moderate complexity CLIA certifications. We will continue to develop and execute our conference and podium strategy to ensure visibility and evidence-based positioning of the TearLab® Osmolarity System among eye care professionals.

Amortization of Intangible Assets

Amortization expense of intangible assets was unchanged for the three and six months ended June 30, 2011 and 2010, as there were no adjustments to the Company’s cost basis or estimated useful life of the underlying assets.

TearLab Corp.

Other Income (Expense)

	Three Months Ended June 30, (in thousands)									Six Months Ended June 30, (in thousands)
	2011			2010			Change			2011			2010			Change
	$			$			$			$			$			$

Interest income		1			8			(7)			3			10			(7	)
Changes in fair value of warrant obligations		(2,506	)		403			(2,909	)		(2,467	)		473			(2,940	)
Warrant issuance costs		(303	)		―			(303	)		(303	)		―			(303	)
Interest expense		(43	)		(53	)		10			(96	)		(105	)		9
Amortization of deferred financing charges, warrants and beneficial conversion values		(241	)		(139	)		(102)			(403	)		(293	)		(110	)
Other		(2	)		(7	)		5			(7	)		(27)			20

		(3,094	)		212			(3,306	)		(3,273	)		58			(3,331	)

Interest Income

Interest income consists of interest earned as a result of the Company’s cash position following the raising of capital. The decrease in interest income in the three and six months ended June 30, 2011, as compared to the three and six months ended June 30, 2010 is indicative of the Company earning interest from lower cash balances than in the prior year.

Changes in Fair Value of Warrants Obligations

The Company has a total of 4,598,769 warrants subject to fair value re-measurement each quarter. An increase of $2,467,000 in the fair value of warrant obligations is recorded as an expense in other income for the six months ended June 30, 2011. A decrease of $473,000 in the fair value of warrant obligations is recorded as a gain in other income for the six months ended June 30, 2010. For the three months ended June, 2011, an expense of $2,506,000 was recorded for the three months ended June 30, 2010, a gain of $403,000 was recorded.

Warrant issuance costs

In June 2011, the Company issued 3,846,154 warrants as part of a private placement transaction, and the allocation of costs of the private placement related to the warrants was $303,000. There were no similar costs in the six months ended June 30, 2010 or the three months ended June 30, 2011 and 2010.

Interest Expense

Interest expense of $43,000 and $53,000 arising from the 2009 convertible notes financing has been recorded in each of the three month periods ended June 30, 2011 and 2010, respectively. For the six months ended June 30, 2011 and 2010, these amounts were $96,000 and $105,000 respectively.

Amortization of Deferred Financing Charges

As a result of the financing that the Company completed in July and August 2009, or the Financing, and which resulted in the purchase of $1.75 million in convertible secured notes by the investors, or the Notes, investors were in a position to convert the Notes at a conversion price of $1.3186 per share at a time when the common shares of the Company were trading at $1.75 (July 15th) and $1.70 (August 31st) providing them with a beneficial conversion feature. The Company valued this feature as $728,000 and the amortization of this amount was expensed over the term of the Notes until conversion in June 2011. As such, amortization expense for the three months ended June 30, 2011 and 2010 was $188,000 and $108,000, respectively. For the six months ended June 30, 2011 and 2010 amortization expense was $314,000 and $228,000, respectively.

Investors in the Financing received 109,375 warrants at an exercise price of $1.60 upon conversion of the Notes. The Company valued these warrants using the Black-Scholes value model at a value of $163,000. The amortization of this amount was recorded over the term of the Notes until it was converted in June 2011 and amounted to $42,000 and $24,000 for the three months ended June 30, 2011 and 2010, respectively. For the six months ended June 30, 2011 and 2010 amortization expense was $70,000 and $51,000, respectively.

TearLab Corp.

Issuance costs of the Financing totaled $87,000 and have been allocated to cost of equity and to deferred finance charges. The amortization of deferred finance charges was recorded over the term of the Notes until it was converted in June 2011 and amounted to $11,000 and $6,000 for the three months ended June 30, 2011 and 2010, respectively. For the six months ended June 30, 2011 and 2010 amortization expense was $19,000 and $14,000, respectively.

Other

Other income for the three and six months ended June 30, 2011 and 2010 consists primarily of foreign exchange gains and losses, based on fluctuations of the Company’s foreign denominated currencies.

Liquidity and Capital Resources

(in thousands)	June 30,			December 31,
	2011			2010			Change

Cash and cash equivalents	$	6,881		$	2,726		$	4,155
Percentage of total assets		45	%		24	%

Working capital	$	829		$	420		$	409

Financial Condition

Management believes that our cash and cash equivalents will be sufficient to meet our operating activities and other demands for at least the next 12 months.

Our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement and involves risks and uncertainties. Actual results could vary as a result of a number of factors. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect. Our future funding requirements will depend on many factors, including but not limited to:

the cost and results, and the rate of progress, of the clinical trials of the TearLab® Osmolarity System that will be required to support TearLab's application to obtain a CLIA waiver from the FDA;

TearLab's ability to obtain a CLIA waiver from the FDA for the TearLab Osmolarity System and the timing of such approval, if any;

whether government and third-party payers agree to reimburse the TearLab Osmolarity System;

whether eye care professionals engage in the process of obtaining their moderate complex CLIA certification;

the costs and timing of building the infrastructure to market and sell the TearLab® Osmolarity System;

the cost and results of continuing development of the TearLab Osmolarity System;

the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights; and

the effect of competing technological and market developments.

At the present time, our only product is the TearLab Osmolarity System, and while we have received 510(k) approval from the FDA which allows us to commercialize our product in the United States, we are currently limited to selling to facilities that have moderate and high complexity CLIA certifications. Obtaining a CLIA waiver approval from the FDA will enable us to market our product to the approximately 50,000 eye care practitioners that do not operate with moderate and high complexity CLIA certifications. At this time, we do not know when we can expect to begin to generate significant revenues from the TearLab Osmolarity System in the United States.

TearLab Corp.

We believe that we have sufficient funding to meet operational needs until the Company becomes cash flow positive from operations but if we are not able to achieve a cash positive operating position in 2012 we may need to raise additional funds, and our prospects for obtaining that capital are uncertain. Additional capital may not be available on terms favorable to us, or at all. In addition, future financings could result in significant dilution of existing stockholders. However, we believe that cash and cash equivalents at June 30, 2011 will be sufficient to allow the Company to operate for a minimum of 12 months.

On June 30, 2011, we closed a private placement financing in which 3,846,154 shares of common stock and warrants to purchase 3,846,154 shares of common stock for gross proceeds of approximately $7,000,000 were purchased. The investors purchased the shares and warrants for $1.82 per unit (each unit consisting of one share and one warrant to purchase shares of common stock). The exercise price of the warrants is $1.86 per share. The warrants are exercisable at any time until June 29, 2016.

Ongoing Sources and Uses of Cash

We anticipate that our cash and cash equivalents and cash generated from increased revenues, will be sufficient to sustain our operations for at least the next 12 months. We continually evaluate various financing possibilities but we typically expect our primary sources of cash will be related to the collection of accounts receivable and, to a lesser degree, interest income on our cash and investment balances. Our accounts receivable collections will be impacted by our ability to grow our point-of-care revenue.

We expect our primary uses of cash will be to fund our operating expenses and pursuing and maintaining our patents and trademarks. In addition, dependent on available funds, we expect to expend cash to improve production capability of the TearLab test, to further improve the performance of the TearLab test, and to pursue additional applications for the lab-on-a-chip technology.

Changes in Cash Flows

	Six months ended June 30, (in thousands)
	2011			2010			Change

Cash used in operating activities	$	(2,012	)	$	(2,520	)	$	508
Cash used in investing activities		(82	)		(25	)		(57	)
Cash provided by financing activities		6,249			7,193			(944	)

Net (decrease) in cash and cash equivalents during the period	$	4,155		$	4,648		$	(493	)

Cash Used in Operating Activities

Net cash used to fund our operating activities during the six months ended June 30, 2011 was $2,012,000. Net loss during the six month period was $6,473,000. The non-cash items which comprise a portion of the net loss during that period consist primarily of the amortization of intangible assets, patents and trademarks, depreciation of fixed assets, stock-based compensation, amortization of prepaid or deferred finance charges, accretion of warrant and beneficial conversion values, non-cash advisory fees paid in common shares and accrued interest from the convertible secured note financing in the aggregate total of $1,775,000. In addition, non-cash amounts which comprise a portion of the net loss during that period include changes in the fair value of warrant obligations and warrant issuance costs of $2,770,000.

The net change in non-cash working capital balances related to operations for the six months ended June 30, 2011 and 2010 consists of the following:

TearLab Corp.

Cash provided (used)	Six months ended June 30, (in thousands)
	2011			2010
Amounts receivable, net	$	74		$	(62	)
Due from related parties		95			(51	)
Inventory		(439	)		(144	)
Prepaid expenses and other current assets		94			147
Other non-current assets		―			67
Accounts payable		341			(149
Accrued liabilities		(121	)		(60	)
Deferred revenue		(128	)		(17	)
Due to stockholders		―			(7	)
	$	(84	)	$	(276	)

Cash Used in Investing Activities

Net cash used in investing activities for the six months ended June 30, 2011 and 2010 was $82,000 and $25,000, respectively, and was used to acquire fixed assets.

Net cash used in investing activities for the six months ended June 30, 2010 was $25,000. Cash used in investing activities during the period consisted of cash in the amount of $25,000 used to acquire fixed assets.

Cash Provided by Financing Activities

During the six months ended June 30, 2011, the Company issued common stock in a private placement funding for $7,000,000 which was offset by issuance costs of $703,000. Additional issuance costs of $48,000 were incurred during the six months ended June 30, 2011 for common shares issued in the conversion of the notes payable and accrued interest and also in the issuance of common shares to Greybrook. During the six months ended June 30, 2010, the Company issued common stock in a private placement funding for $3,000,000 and in a registered direct funding for $5,000,000, offset by costs paid in the six months ended June 30, 2010 of $807,000.

Critical Accounting Policies and Estimates

Management’s discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements which are prepared in accordance with accounting principles that are generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, related disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. We continually evaluate our estimates and judgments, the most critical of which are those related to revenue recognition and inventory valuation. We base our estimates and judgments on historical experience and other factors that we believe to be reasonable under the circumstances. Materially different results can occur as circumstances change and additional information becomes known.

There were no significant changes during the six months ended June 30, 2011 to the items that we disclosed as our critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

Recent Accounting Pronouncements

For information on the recent accounting pronouncements impacting our business, see Note 2 of the Notes to the unaudited Consolidated Financial Statements for the six months ended June 30, 2011 included in Item 1.

TearLab Corp.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Currency Fluctuations and Exchange Risk

All of our sales are in U.S. dollars, while a minor portion of our expenses are in Canadian dollars and Australian dollars. We cannot predict any future trends in the exchange rate of the Canadian dollar or Australian dollar against the U.S. dollar. Any strengthening of the Canadian dollar or Australian dollar in relation to the U.S. dollar would increase the U.S. dollar cost of our operations, and affect our U.S. dollar measured results of operations. We maintain bank accounts in both Canadian dollars and Australian dollars to meet short term operational operating requirements. Based on the balances in the Canadian dollar and Australian dollar denominated bank accounts at June 30, 2011, hypothetical increases of $0.01 in the value of the Canadian dollar and the Australian dollar in relation to the U.S. dollar would not have a material impact on our results of our operations. We do not engage in any hedging or other transactions intended to manage these risks. In the future, we may undertake hedging or other similar transactions or invest in market risk sensitive instruments if we determine that is advisable to offset these risks.

Interest Rate Risk

The primary objective of our investment activity is to preserve principal while maximizing interest income we receive from our investments, without increasing risk. We believe this will minimize our market risk. We do not use interest rate derivative transactions to manage our interest rate risk. We reduce our exposure to interest rate risk by investing in investment grade securities or money market accounts. Declines in interest rates over an extended period of time will reduce our interest income while an increase over an extended period of time will increase our interest income. A reduction of interest rate by 100 basis points over the six months ended June 30, 2011 would reduce interest income by under $1,000.

ITEM 4. CONTROLS AND PROCEDURES

(a) Disclosure Controls and Procedures.

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to the our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefit of controls must be considered relative to their costs. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As of the end of the period covered by the report, we carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based on that evaluation, our chief executive officer and chief financial officer concluded that, as at June 30, 2011 our disclosure controls and procedures were effective at the reasonable assurance level.

(b) Changes in Internal Control over Financial Reporting.

During the second quarter of 2011, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

TearLab Corp.

PART II.

OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

We are not aware of any material litigation involving us that is outstanding, threatened or pending.

ITEM 1A. RISK FACTORS

Risks Relating to our Business

Our near-term success is highly dependent on the success of the TearLab® Osmolarity System, and we cannot be certain that it will receive regulatory approval or be successfully commercialized in the United States.

The TearLab Osmolarity System is currently our only product. Our product is currently sold outside of the United States pursuant to CE mark approval; in Canada pursuant to a Health Canada Medical Device License; and in the United States as a result of having received 510(k) approval from the FDA, to market the TearLab Osmolarity System to those reference and physician operated laboratories with moderate and high complexity, Clinical Laboratory Improvement Act, or CLIA, certifications. We are applying for a CLIA waiver from the U.S. Food and Drug Administration, or the FDA, which will allow us to sell to those eye care professionals in the United States who do not have CLIA certifications to perform moderate and high complexity tests. Even if the TearLab Osmolarity System receives all regulatory approvals in the United States, it may never be successfully commercialized. If the TearLab Osmolarity System does not receive all regulatory approvals or is not successfully commercialized, we may not be able to generate revenue, become profitable or continue our operations. Any failure of the TearLab Osmolarity System to receive regulatory approvals or to be successfully commercialized in the United States would have a material adverse effect on our business, operating results, financial condition and cash flows and could result in a substantial decline in the price of our common stock.

On March 4, 2011, the Company announced that it was in receipt of a communication from the U.S. Food and Drug Administration, or the FDA indicating that the data submitted by the Company was not sufficient to gain approval of its CLIA Waiver categorization application for the TearLab Osmolarity System. The Company is reviewing the comments made by the FDA and developing the necessary responses or strategies required to continue to pursue the CLIA waiver.

Our near-term success is highly dependent on increasing sales of the TearLab Osmolarity System outside the United States, and we cannot be certain that we will successfully increase such sales.

Our product is currently sold outside of the United States pursuant to CE mark approval and Health Canada Approval in Canada. Our near-term success is highly dependent on increasing our international sales. We may also be required to register our product with health departments in our foreign market countries. A failure to successfully register in such markets would negatively affect our sales in any such markets. In addition, import taxes are levied on our product in certain foreign markets. These foreign markets include Turkey, Spain, Italy and France. Other countries may adopt taxation codes on imported products. Increases in such taxes or other restrictions on our product could negatively affect our ability to import, distribute and price our product.

TearLab Corp.

Our limited working capital and history of losses have resulted in our auditors expressing doubts as to whether we will be able to continue as a going concern.

In the year ended December 31, 2010, and the six months ended June 30, 2011, we had prepared our consolidated financial statements on the basis that we would continue as a going concern. However, we have sustained substantial losses for each of the years ended December 31, 2005, 2006, 2007, 2008, 2009 and 2010 and also for the six months ended June 30, 2011. Our net working capital balance at June 30, 2011 was $0.8 million which represents a $0.4 million increase from our working capital balance of $0.4 million at December 31, 2010. During the year ended December 31, 2010, the Company raised gross proceeds of $8.0 million in private placement and registered direct financings and in the six months ended June 2011 the Company raised gross proceeds of $7.0 million in a private placement financing.

Although current levels of cash flows are negative, management believes the Company’s existing cash as well as the proceeds from the funding received in the six months ended June 30, 2011 will be sufficient to cover its operating and other cash demands for at least the next 12 months.

Our consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary if we were not able to continue as a going concern.

We have incurred losses since inception and anticipate that we will incur continued losses for the foreseeable future.

We have incurred losses in each year since our inception. As of June 30, 2011, we had an accumulated deficit of $385.2 million which includes a loss of $6.5 million for the six months ended June 30, 2011. Our losses have resulted primarily from expenses incurred in research and development of our product candidates from the former retina and glaucoma business divisions.

We do not know when or if we will receive CLIA waiver approval from the FDA for the TearLab Osmolarity® System or successfully commercialize it in the United States. As a result, and because of the numerous risks and uncertainties facing us, it is difficult to provide the extent of any future losses or the time required to achieve profitability, if at all. Any failure of our product candidate to obtain regulatory approval and any failure to become and remain profitable would adversely affect the price of our common stock and our ability to raise capital and continue operations.

We are leveraged financially, which could adversely affect our ability to adjust our business to respond to competitive pressures and to obtain sufficient funds to satisfy our future research and development needs, and to defend our intellectual property.

As of June 30, 2011, our total indebtedness was approximately $7.6 million. If we are at any time unable to generate sufficient cash flow to service our indebtedness when payment is due, we may be required to attempt to renegotiate the terms of the instruments relating to the indebtedness, seek to refinance all or a portion of the indebtedness or obtain additional financing. There can be no assurance that we will be able to successfully renegotiate such terms, that any such refinancing would be possible or that any additional financing could be obtained on terms that are favorable or acceptable to us.

We may not be able to raise the capital necessary to fund our operations.

Since inception, we have funded our operations through debt and equity financings, including 2008 common stock and debt bridge financings, 2009 convertible secured debt financings, the 2010 private placement and registered direct common stock financings and the 2011 private placement. Our prospects for obtaining additional financing are uncertain. Additional capital may not be available on terms favorable to us, or at all. If financing is available, it may not be sufficient for us to continue as a going concern and it may be on terms that adversely affect the interest of our existing stockholders. In addition, future financings could result in significant dilution of existing stockholders and adversely affect the economic interests of existing stockholders.

TearLab Corp.

We will face challenges in bringing the TearLab® Osmolarity System to market in the United States and may not succeed in executing our business plan.

There are numerous risks and uncertainties inherent in the development of new medical technologies. In addition to our requirement for additional capital, our ability to bring the TearLab Osmolarity System to market in the United States and to execute our business plan successfully is subject to the following risks, among others:

Our clinical trials may not succeed. Clinical testing is expensive and can take longer than originally anticipated. The outcomes of clinical trials are uncertain, and failure can occur at any stage of the testing. We could encounter unexpected problems, which could result in a delay in the follow-up submission of our application for the sought-after CLIA waiver from the FDA or prevent its submission altogether.

·	We may not receive the CLIA waiver for the TearLab Osmolarity System from the FDA, in which case our ability to market the TearLab Osmolarity System in the United States will be impacted.

The TearLab Osmolarity System is rated under a moderately complex CLIA certification which requires our customers to be certified under the moderately complex CLIA requirements, including certain parallel state requirements. If our customers are unwilling or unable to comply with such requirements, it could have an adverse effect on our ability to market the TearLab Osmolarity System in the United States.

Our suppliers and we will be subject to numerous FDA requirements covering the design, testing, manufacturing, quality control, labeling, advertising, promotion and export of the TearLab Osmolarity System and other matters. If our suppliers or we fail to comply with these regulatory requirements, the TearLab Osmolarity System could be subject to restrictions or withdrawals from the market and we could become subject to penalties.

Even if we succeed in obtaining the sought-after FDA approvals, we may be unable to commercialize the TearLab® Osmolarity System successfully in the United States. Successful commercialization will depend on a number of factors, including, among other things, achieving widespread acceptance of the TearLab Osmolarity System among physicians, establishing adequate sales and marketing capabilities, addressing competition effectively, the ability to obtain and enforce patents to protect proprietary rights from use by would-be competitors, key personnel retention and ensuring sufficient manufacturing capacity and inventory to support commercialization plans.

If we are subject to regulatory enforcement action as a result of our failure to comply with regulatory requirements, our commercial operations would be harmed.

TearLab Corp.

While we received the 510(k) clearance that we were seeking, we will be subject to significant ongoing regulatory requirements, and if we fail to comply with these requirements, we could be subject to enforcement action by the FDA or state agencies, including:

·	adverse publicity, warning letters, fines, injunctions, consent decrees and civil penalties;

·	repair, replacement, refunds, recall or seizure of our product;

·	operating restrictions or partial suspension or total shutdown of production;

·	delay or refusal of our requests for 510(k) clearance or premarket approval of new products or of new intended uses or modifications to our existing product;

·	refusal to grant export approval for our products;

·	withdrawing 510(k) clearances or premarket approvals that have already been granted; and

·	criminal prosecution.

If any of these enforcement actions were to be taken by the government, our business could be harmed.

We are required to demonstrate and maintain compliance with the FDA’s Quality System Regulation, or the QSR. The QSR is a complex regulatory scheme that covers the methods and documentation of the design, testing, control, manufacturing, labeling, quality assurance, packaging, storage and shipping of our products. The FDA must determine that the facilities which manufacture and assemble our products that are intended for sale in the United States, as well as the manufacturing controls and specifications for these products, are compliant with applicable regulatory requirements, including the QSR. The FDA enforces the QSR through periodic unannounced inspections. Our facilities have not yet been inspected by the FDA, and we cannot assure you that we will pass any future FDA inspection. Our failure, or the failure of our suppliers, to take satisfactory corrective action in response to an adverse QSR inspection could result in enforcement actions, including a public warning letter, a shutdown of our manufacturing operations, a recall of our product, civil or criminal penalties or other sanctions, which would significantly harm our available inventory and sales and cause our business to suffer.

Our patents may not be valid, and we may not be able to obtain and enforce patents to protect our proprietary rights from use by would-be competitors. Patents of other companies could require us to stop using or pay to use required technology.

Our owned and licensed patents may not be valid, and we may not be able to obtain and enforce patents and to maintain trade secret protection for our technology. The extent to which we are unable to do so could materially harm our business.

We have applied for, and intend to continue to apply for, patents relating to the TearLab® Osmolarity System and related technology and processes. Such applications may not result in the issuance of any patents, and any patents now held or that may be issued may not provide adequate protection from competition. Furthermore, it is possible that patents issued or licensed to us may be challenged successfully. In that event, if we have a preferred competitive position because of any such patents, any preferred position would be lost. If we are unable to secure or to continue to maintain a preferred position, the TearLab Osmolarity System could become subject to competition from the sale of generic products.

TearLab Corp.

Patents issued or licensed to us may be infringed by the products or processes of others. The cost of enforcing patent rights against infringers, if such enforcement is required, could be significant and the time demands could interfere with our normal operations. There has been substantial litigation and other proceedings regarding patent and other intellectual property rights in the pharmaceutical, biotechnology and medical technology industries. We could become a party to patent litigation and other proceedings. The cost to us of any patent litigation, even if resolved in our favor, could be substantial. Some of our would-be competitors may be able to sustain the costs of such litigation more effectively than we can because of their substantially greater financial resources. Litigation may also absorb significant management time.

Unpatented trade secrets, improvements, confidential know-how and continuing technological innovation are important to our future scientific and commercial success. Although we attempt to, and will continue to attempt to, protect our proprietary information through reliance on trade secret laws and the use of confidentiality agreements with corporate partners, collaborators, employees and consultants and other appropriate means, these measures may not effectively prevent disclosure of our proprietary information, and, in any event, others may develop independently, or obtain access to, the same or similar information.

Certain of our patent rights are licensed to us by third parties. If we fail to comply with the terms of these license agreements, our rights to those patents may be terminated, and we will be unable to conduct our business.

It is possible that a court may find us to be infringing upon validly issued patents of third parties. In that event, in addition to the cost of defending the underlying suit for infringement, we may have to pay license fees and/or damages and may be enjoined from conducting certain activities. Obtaining licenses under third-party patents can be costly, and such licenses may not be available at all.

We may face future product liability claims.

The testing, manufacturing, marketing and sale of therapeutic and diagnostic products entail significant inherent risks of allegations of product liability. Our past use of the RHEO™ System and the components of the SOLX Glaucoma System in clinical trials and the commercial sale of those products may have exposed us to potential liability claims. Our use of the TearLab Osmolarity System and its commercial sale could also expose us to liability claims. All of such claims might be made directly by patients, health care providers or others selling the products. We carry clinical trials and product liability insurance to cover certain claims that could arise, or that could have arisen, during our clinical trials or during the commercial use of our products. We currently maintain clinical trials and product liability insurance with coverage limits of $2,000,000 in the aggregate annually. Such coverage, and any coverage obtained in the future, may be inadequate to protect us in the event of successful product liability claims, and we may not be able to increase the amount of such insurance coverage or even renew it. A successful product liability claim could materially harm our business. In addition, substantial, complex or extended litigation could result in the incurrence of large expenditures and the diversion of significant resources.

We have entered into a number of related party transactions with suppliers, creditors, stockholders, officers and other parties, each of which may have interests which conflict with those of our public stockholders.

We have entered into several related party transactions with our suppliers, creditors, stockholders, officers and other parties, each of which may have interests which conflict with those of our public stockholders.

TearLab Corp.

If we do not introduce new commercially successful products in a timely manner, our products may become obsolete over time, customers may not buy our products and our revenue and profitability may decline.

Demand for our products may change in ways we may not anticipate because of:

·	evolving customer needs;

·	the introduction of new products and technologies; and

·	evolving industry standards.

Without the timely introduction of new commercially successful products and enhancements, our products may become obsolete over time, in which case our sales and operating results would suffer. The success of our new product offerings will depend on several factors, including our ability to:

·	properly identify and anticipate customer needs;

·	commercialize new products in a cost-effective and timely manner;

·	manufacture and deliver products in sufficient volumes on time;

·	obtain and maintain regulatory approval for such new products;

·	differentiate our offerings from competitors’ offerings;

·	achieve positive clinical outcomes; and

·	provide adequate medical and/or consumer education relating to new products.

Moreover, innovations generally will require a substantial investment in research and development before we can determine the commercial viability of these innovations and we may not have the financial resources necessary to fund these innovations. In addition, even if we are able to successfully develop enhancements or new generations of our products, these enhancements or new generations of products may not produce revenue in excess of the costs of development and they may be quickly rendered obsolete by changing customer preferences or the introduction by our competitors of products embodying new technologies or features.

We rely on a single supplier of each of the key components of the TearLab® Osmolarity System and are vulnerable to fluctuations in the availability and price of our suppliers’ products and services.

We purchase each of the key components of the TearLab Osmolarity System from single third-party suppliers. Our supplier may not provide the components or other products needed by us in the quantities requested, in a timely manner or at a price we are willing to pay. In the event we were unable to renew our agreements with our supplier or they were to become unable or unwilling to continue to provide important components in the required volumes and quality levels or in a timely manner, or if regulations affecting the components were to change, we would be required to identify and obtain acceptable replacement supply sources. We may not be able to obtain alternative suppliers or vendors on a timely basis, or at all, which could disrupt or delay, or halt altogether, our ability to manufacture or deliver the TearLab Osmolarity System. If any of these events should occur, our business, financial condition, cash flows and results of operations could be materially adversely affected.

TearLab Corp.

We face intense competition, and our failure to compete effectively could have a material adverse effect on our results of operations.

We face intense competition in the markets for ophthalmic products and these markets are subject to rapid and significant technological change. Although we have no direct competitors, we have numerous potential competitors in the United States and abroad. We face potential competition from industry participants marketing conventional technologies for the measurement of osmolarity and other in-lab testing technologies, as well as industry participants developing and marketing point-of-care tests, such as the technology being developed by the Aborn Eye Clinic, which is reportedly able to measure the osmolarity of nanoliter tear samples, and commercially available methods, such as the Schirmer Test and ocular surface staining. Many of our potential competitors have substantially more resources and a greater marketing scale than we do. If we are unable to develop and produce or market our products to effectively compete against our competitors, our operating results will materially suffer.

If we lose key personnel, or we are unable to attract and retain highly qualified personnel on a cost-effective basis, it would be more difficult for us to manage our existing business operations and to identify and pursue new growth opportunities.

Our success depends, in large part, upon our ability to attract and retain highly qualified scientific, clinical, manufacturing and management personnel. In addition, any difficulties retaining key personnel or managing this growth could disrupt our operations. Future growth will require us to continue to implement and improve our managerial, operational and financial systems, and to continue to recruit, train and retain, additional qualified personnel, which may impose a strain on our administrative and operational infrastructure. The competition for qualified personnel in the medical technology field is intense. We are highly dependent on our continued ability to attract, motivate and retain highly qualified management, clinical and scientific personnel.

Due to our limited resources, we may not be able to effectively recruit, train and retain additional qualified personnel. If we are unable to retain key personnel or manage our growth effectively, we may not be able to implement our business plan.

Furthermore, we have not entered into non-competition agreements with our key employees. In addition, we do not maintain “key person” life insurance on any of our officers, employees or consultants. The loss of the services of existing personnel, the failure to recruit additional key scientific, technical and managerial personnel in a timely manner, and the loss of our employees to our competitors would harm our research and development programs and our business.

If we fail to establish and maintain proper and effective internal controls, our ability to produce accurate financial statements on a timely basis could be impaired, which would adversely affect our consolidated operating results, our ability to operate our business and our stock price.

Ensuring that we have adequate internal financial and accounting controls and procedures in place to produce accurate financial statements on a timely basis is a costly and time-consuming effort that needs to be re-evaluated frequently. Failure on our part to maintain effective internal financial and accounting controls would cause our financial reporting to be unreliable, could have a material adverse effect on our business, operating results, financial condition and cash flows, and could cause the trading price of our common stock to fall dramatically.

TearLab Corp.

Maintaining proper and effective internal controls will require substantial management time and attention and may result in our incurring substantial incremental expenses, including with respect to increasing the breadth and depth of our finance organization to ensure that we have personnel with the appropriate qualifications and training in certain key accounting roles and adherence to certain control disciplines within the accounting and reporting function. Any failure in internal controls or any additional errors or delays in our financial reporting would have a material adverse effect on our business and results of operations and could have a substantial adverse impact on the trading price of our common stock.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP. Our management does not expect that our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Our management has identified a control deficiency in the past and may identify additional deficiencies in the future.

We cannot be certain that the actions we are taking to improve our internal controls over financial reporting will be sufficient or that we will be able to implement our planned processes and procedures in a timely manner. In future periods, if the process required by Section 404 of the Sarbanes-Oxley Act of 2002 reveals material weaknesses or significant deficiencies, the correction of any such material weaknesses or significant deficiencies could require additional remedial measures which could be costly and time-consuming. In addition, we may be unable to produce accurate financial statements on a timely basis. Any of the foregoing could cause investors to lose confidence in the reliability of our consolidated financial statements, which could cause the market price of our common stock to decline and make it more difficult for us to finance our operations and growth.

The trading price of our common stock may be volatile.

The market prices for, and the trading volumes of, securities of medical device companies, such as ours, have been historically volatile. The market has experienced, from time to time, significant price and volume fluctuations unrelated to the operating performance of particular companies. The market price of our common shares may fluctuate significantly due to a variety of factors, including:

·	the results of pre-clinical testing and clinical trials by us, our collaborators and/or our competitors;

·	technological innovations or new diagnostic products;

·	governmental regulations;

·	developments in patent or other proprietary rights;

·	litigation;

·	public concern regarding the safety of products developed by us or others;

·	comments by securities analysts;

·	the issuance of additional shares to obtain financing or for acquisitions;

·	general market conditions in our industry or in the economy as a whole; and

·	political instability, natural disasters, war and/or events of terrorism.

TearLab Corp.

In addition, the stock market has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of individual companies. Broad market and industry factors may seriously affect the market price of companies’ stock, including ours, regardless of actual operating performance. In the past, following periods of volatility in the overall market and the market price of a particular company’s securities, securities class action litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.

Because we do not expect to pay dividends on our common stock, stockholders will benefit from an investment in our common stock only if it appreciates in value.

We have never paid cash dividends on our common stock and have no present intention to pay any dividends in the future. We are not profitable and there is no certainty that we will be able to earn any material revenues for at least several years, if at all. As a result, we intend to use all available cash and liquid assets in the development of our business. Any future determination about the payment of dividends will be made at the discretion of our board of directors and will depend upon our earnings, if any, our capital requirements, our operating and financial conditions and on such other factors as our board of directors may deem relevant. As a result, the success of an investment in our common stock will depend upon any future appreciation in its value. There is no guarantee that our common stock will appreciate in value or even maintain the price at which stockholders have purchased their shares.

Warrant holders will not be entitled to any of the rights of common stockholders, but will be subject to all changes made with respect thereto.

If you hold warrants, you will not be entitled to any rights with respect to our common stock (including, without limitation, voting rights and rights to receive any dividends or other distributions on our common stock), but you will be subject to all changes affecting our common stock. You will have rights with respect to our common stock only if you receive our common stock upon exercise of the warrants and only as of the date when you become a record owner of the shares of our common stock upon such exercise. For example, if an amendment is proposed to our charter or bylaws requiring stockholder approval and the record date for determining the stockholders of record entitled to vote on the amendment occurs prior to the date you are deemed to be the owner of the shares of our common stock due upon exercise of your warrants, you will not be entitled to vote on the amendment, although you will nevertheless be subject to any changes in the powers, preferences or special rights of our common stock.

We can issue shares of preferred stock that may adversely affect the rights of holders of our common stock.

Our certificate of incorporation authorizes us to issue up to 10,000,000 shares of preferred stock with designations, rights, and preferences determined from time to time by our board of directors. Accordingly, our board of directors is empowered, without stockholder approval, to issue preferred stock with dividend, liquidation, conversion, voting or other rights superior to those of holders of our common stock. For example, an issuance of shares of preferred stock could:

·	adversely affect the voting power of the holders of our common stock;

·	make it more difficult for a third party to gain control of us;

TearLab Corp.

·	discourage bids for our common stock at a premium;

·	limit or eliminate any payments that the holders of our common stock could expect to receive upon our liquidation; or

·	otherwise adversely affect the market price or our common stock.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

As discussed in Management’s Discussion and Analysis under the heading Recent Developments, the Company issued unregistered securities during the second quarter of 2011 related to the conversion of outstanding notes and a private placement transaction.

On June 13, 2011, the Company issued 1,629,539 shares of its common stock and warrants to purchase 109,375 shares of its common stock in consideration of conversion and retirement of the Company’s outstanding July and August 2009 debt obligations in the aggregate amount of $2,149,000, with associated issuance costs of $41,000. The issuance of shares of common stock and warrants to purchase common stock in connection with the note conversion is also described in the Company’s Current Report on Form 8-K filed on June 15, 2011. The securities were offered in the United States to “accredited investors” pursuant to the exemption from the registration requirements under the Securities Act of 1933, as amended (the “Securities Act”), afforded by Regulation D promulgated thereunder.

On June 30, 2011, the Company sold 3,846,154 shares of its common stock and warrants to purchase approximately 3,846,154 shares of its common stock for gross proceeds of approximately $7,000,000 in a private placement transaction. The issuance of shares of common stock and warrants to purchase common stock in connection with the private placement is also described in the Company’s Current Report on Form 8-K filed on June 28, 2011, as amended on July 5, 2011. The securities were offered in the United States to “accredited investors” pursuant to the exemption from the registration requirements under the Securities Act of 1933, as amended (the “Securities Act”), afforded by Regulation D promulgated thereunder.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

There has not been any default upon our senior securities.

ITEM 4. (REMOVED AND RESERVED)

ITEM 5. OTHER INFORMATION

None.

TearLab Corp.

ITEM 6. EXHIBITS

2.1		Form of Plan of Reorganization (incorporated by reference to Exhibit 2.1 to the Registrant’s Registration Statement on Form S-1/A No. 4, filed with the Commission on December 6, 2004 (file no. 333-118024)).

3.1		Restated Certificate of Incorporation of Registrant, filed with the Secretary of State of the State of Delaware on October 7, 2008 (incorporated by reference to Exhibit 3.3 to the Registrant’s Current Report on Form 8-K filed with the Commission on October 9, 2008 (file no. 000-51030)).
3.2		Certificate of Amendment of Registrant, filed with the Secretary of State of the State of Delaware on October 7, 2008 (incorporated by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K filed with the Commission on October 9, 2008 (file no. 000-51030)).
3.3		Certificate of Amendment of Registrant, filed with the Secretary of State of the State of Delaware on May 18, 2010 (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on May 19, 2010 (file no. 000-51030)).

3.4		Certificate of Amendment of Registrant, filed with the Secretary of State of the State of Delaware on July 13, 2011 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on July 1, 2011 (file no. 000-51030)).

3.5

Amended and Restated By-Laws of the Registrant as currently in effect (incorporated by reference to Exhibit 10.4 to the Registrant’s Registration Statement on Form S-1/A No. 3, filed with the Commission on November 16, 2004 (file no. 333-118024)).

10.1

2002 Stock Option Plan, as amended and restated on June 24, 2010.

10.2

Manufacturing and Development Agreement by and between TearLab Research, Inc. and MiniFAB (Aust) Pty Ltd, dated August 1, 2011(incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on August 4, 2011 (file no. 000-51030)).+.

31.1

CEO’s Certification required by Rule 13a-14(a) of the Securities Exchange Act of 1934.

31.2

CFO’s Certification required by Rule 13a-14(a) of the Securities Exchange Act of 1934.

32.1

CEO’s Certification of periodic financial reports pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2

CFO’s Certification of periodic financial reports pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS*

XBRL Instance

101.SCH*

XBRL Taxonomy Extension Schema

101.CAL*

XBRL Taxonomy Extension Calculation

101.DEF*

XBRL Taxonomy Extension Definition

101.LAB*

XBRL Taxonomy Extension Labels

101.PRE*

XBRL Taxonomy Extension Presentation

Portions of this exhibit have been omitted pursuant to a request for confidential treatment and the non-public information has been filed separately with the SEC.

XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

TearLab Corp.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		TearLab Corp.
		(Registrant)


Date:	August 12, 2011	/s/ Elias Vamvakas
		Elias Vamvakas
		Chief Executive Officer

Attached files

TearLab Corp Reports

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